Tajikistan: Cotton Banking Leading to Ruin

Days after an independent audit revealing shocking levels of graft dealt another body blow to confidence in Tajikistan's beleaguered economy, President Imomali Rahmon on April 15 warned his compatriots not to be sidetracked by an alleged "information war" being waged against Tajikistan.

The financing of cotton -- or "white gold" as Tajik leaders call it -- is again tied to scandal and embezzlement. In a recently released report, Ernst & Young auditors say that former National Bank head Murodali Alimardon misappropriated over $850 million in state funds, much intended for cotton-related projects. Alimardon, who professed his innocence in an interview published by the Asia-Plus news agency April 16, is the current deputy prime minister for agriculture.

But even before the Ernst & Young report, Tajik banks were feeling the squeeze brought on by years of dubious lending to support Tajikistan's troubled cotton sector.

The problems are linked to years of bad management, analysts and Western diplomats tell EurasiaNet. Since the mid-1990s, the industry has relied on the services of futures companies that provide farmers with seeds, fertilizers, diesel and machinery at excessive prices in exchange for future harvests. Those companies have links to government officials who use their clout to force farmers to plant the loss-making crop, further muddying the accounting, the sources said.

Approximately half of the country's population of 7 million is involved in cotton harvesting, according to unofficial estimates. The Ministry of Agriculture says their debt to futures companies is at least $500 million.

In early 2008, after the International Monetary Fund (IMF) found the Tajik government had been misrepresenting its assets to gain priority loans, the government approved a mechanism for agricultural financing through commercial banks. As part of the plan, the government provided banks with $41 million at between 12 and 18 percent interest to credit cotton farmers. The banks had until April 1, 2009 to return the sum to the government. All have failed. The finance ministry reports only one-third of farmers have repaid their debts.

Tajikistan had its smallest cotton crop in history in 2008, bringing in only 64 percent of the planned harvest to market. The agriculture ministry says that the lack of mineral fertilizers, poor weather and insufficient financing caused the failure. World cotton prices have also suffered since last July.

Analysts warn that major Tajik banks may now go bankrupt. Financial analyst Davron Kurbonaliev told Khujand's Varorud news agency on April 3 that "non-repayment of cotton credits will turn into a big problem for banks: along with decreased liquidity, the banks' statutory capital and credit portfolios will also decrease. The banks will not be able to finance other sectors of economy and social infrastructure . . . it will result in the decrease of tax revenues."

The two biggest Tajik banks -- Agroinvestbank and Orionbank -- have publicly stated that they will be unable to pay back the credits this year and have asked the finance ministry to prolong the terms of repayment for another 18 months. On April 15, President Rahmon recommended the return period be extended until the end of this year's growing season on November 1.

As crisis looms and the Ernst & Young audit details the damage, officials and the local press are searching for a new scapegoat, pointing fingers at international monetary institutions and donors, blaming them for continuing to support the government despite years of compounded crises.

For years, these institutions allocated multimillion-dollar loans and grants to "help the government resolve the cotton problem," an official from the Ministry of Agriculture told EurasiaNet on condition of anonymity. "Most of this money goes to foreign and local consultants who develop sophisticated strategies and write thick reports to be kept on the shelf, but the arrears keep growing." In the meantime, farmers' livelihoods have become increasingly precarious, he added.

Political scientist Parviz Mullojanov agrees, but is more concerned that the scandal will further undermine Tajikistan's already tarnished image. "First of all, it will affect the country's investment attractiveness, which leaves much to be desired," he said. "And the authorities will try their best to hush up the scandal. This is not only about the National Bank and not only about mismanagement. Dozens of people are involved."

Indeed, most blame lies in government, said a recent study in The Problems of Post-Communism, an academic journal. Don Van Atta, consultant to a number of European Union missions, described how senior officials have been working for years to enrich themselves at the expense of the country's financial institutions and cotton farmers.

Following the central government's guidelines, local administrations force farmers to grow nothing but cotton for personal enrichment, often keeping growers in states of indentured servitude, Van Atta wrote.

Privatization of the sector in the 1990s enabled "a few well-connected individuals and firms to use the power to the state to extract revenue from cotton sector -- and put the revenue in their own pockets. This interpenetration of the 'private' investors with the Tajik state explains why the government has acted to enforce cotton cultivation despite its apparent unprofitability," the report added.

Donors say they have been urging the government to move away from forced cotton cultivation since the mid-1990s, but complain privately that government officials are too fused with the industry to legislate any change.

Cotton farmers might find comfort in the solution of one Tajik opposition politician. Requesting anonymity, he told EurasiaNet that "[t]hree or four of the wealthiest Tajik officials could split the bill [with their private funds] and rehabilitate the whole agricultural sector, or build the Rogun hydropower plant, or do something else for the nation -- if only they really cared about their people."